'Vulture investor' stalking Steel

Christian MillmanOf The Morning Call

The man who may end up buying Bethlehem Steel isn't exactly in the glamour business. There's nothing glamorous about poring over the mistakes of others, especially when those mistakes have left once-mighty companies crumbled and humbled.

But that's exactly what Wilbur Ross does. In the mid-1990s, when Bethlehem Steel was making tens of millions of dollars and its stock was sitting at about $20, he wouldn't have given it a second glance. But today, with the storied steelmaker bleeding hundreds of millions of dollars and its shares selling for under a quarter, he's intensely interested. Indeed, Ross could be the last hope for the company that is quickly running out of cash and options.

Ross is what's known as a vulture investor, a term used to describe those who swoop in as a company lies dying or dead and pick over the pieces looking for profit. His company, W.L. Ross & Co. of New York, has done so many times.

Some examples: When Fruit of the Loom and Burlington Industries ran into financial peril, Ross bought their nearly worthless corporate bonds when other investors were fleeing. He purchased a major Japanese bank outright a year after it collapsed. And he entered the steel industry earlier this year when he bought bankrupt LTV Corp., one of the nation's largest steelmakers, and created a company called International Steel Group from the remains.

All this since he formed his company in 2000. Before that, he spent 24 years with Rothschild, a respected international investment bank based in New York. There, he was involved in some of the largest and most visible bankruptcy cases in American corporate history -- Texaco, Continental Airlines, TWA and Donald Trump's Taj Mahal casino.

A nickname emerged during those days that sticks with him still: The King of Bankruptcy.

Bethlehem Steel, his latest target, has been in bankruptcy protection since October 2001. Last week, the company announced that it had signed a 60-day due diligence agreement with Ross. The agreement allows Ross to spend the next two months poring over all the books, crunching all the numbers and otherwise doing what he needs to determine whether he wants to make an offer to buy Bethlehem Steel.

One would think that a man known for his ability to take advantage of distressed companies and their investors would have to watch his back as he strolls along the Manhattan streets near his office. The financial world is, after all, a smaller one than most people think, and grudges are long held.

Not so.

Trump is one of the most colorful men on the receiving end of Ross' hard-nosed bargaining tactics. When Trump's Taj Mahal casino was in financial trouble in 1990 and was about to miss a $47 million bond payment, Ross was retained by bondholders to represent them.

The high-stakes battle between the two got personal when Trump made a settlement offer to bondholders that Ross belittled to The New York Times as being "too early for Christmas." Trump reportedly hit the roof. After another spat, Trump fired off a press release calling off the negotiations and accusing Ross of unreasonable demands.

Today, though, reason, and even friendship have returned to the relationship between the two.

"Wilbur's a terrific individual," said Trump from his Manhattan office. "And he's a wonderful businessman."

It helps that Trump ended up regaining control of that casino, while still meeting the demands of the bondholders Ross represented. "It worked out fantastic for me at the Taj," Trump said.

Looking for a solution

That's one of Ross' strengths, say those who have faced off against him -- if there is a solution where everyone is reasonably accommodated, he finds it. To get there, he doesn't yell, he doesn't threaten and he doesn't lie.

"This is a very well-regarded man who has been very successful at what he does," said Peter Marcus, managing partner at investment firm World Steel Dynamics. "He's a leader in his field."

But Ross will have to be more than a leader to pull off a deal with Bethlehem Steel; he'll have to be something of a magician. For one thing, Bethlehem Steel isn't yet a carcass to pick over. It's an operating company, albeit under bankruptcy protection.

And that brings with it all sorts of messiness, such as existing union contracts that are restrictive and inflexible, and major customers who would bolt if they feel their needs are ignored. There's also the emotionally charged issue of 74,000 retirees -- 25,000 of whom are local -- who stand to lose their health care benefits if Ross negotiates them away.

It could be the most complicated negotiation Ross and his new company have initiated.

According to Ross, that's just fine. For one thing, he never much liked the vulture label anyway and this might be yet another chance to put it to rest.

"If we had a bird that had to be a model, it would be a phoenix," he said. A phoenix is the bird of legend that rises from the ashes to begin anew.

"We're not liquidators," he said. Instead, he generally rehabilitates the companies to sell them a few years down the road when their value has been restored.

In the process, he makes himself and his investors hundreds of millions of dollars on the best deals.

"If he's really worth it, I don't begrudge him that kind of pay," said Mary E. Deily, associate professor of economics at Lehigh University and an expert on declining industries, particularly the steel industry.

Someone, she said, needs to revamp the business model for most of the nation's steelmakers. And maybe Ross is the one to do so, especially considering his success with International Steel Group. That company is operating with fewer than a quarter of the employees it had under the former LTV yet is producing 90 percent of the amount of steel LTV pumped out yearly.

"LTV had seven layers of management between the CEO and the factory floor," Ross said. "We have three."

The company is doing so much better than planned that, in the last few months, Ross authorized two sets of bonus checks to be issued to all workers -- one for 20 hours of pay, the other for a week.

"Everything has worked better than we thought and we felt that had to be recognized," Ross said.

Changing the culture

It was a simple thing to do but one that reflects an entirely foreign approach to labor relations in the steel industry. That type of unexpected bonus wouldn't have happened before when every management concession was fought for tooth-and-nail by the union.

"He may be trying to change the culture of the industry," said Deily. "Labor relations in the industry have been a disaster for a long time. It's been very destructive."

For Ross, it's less about being an industry radical and more about running a company properly. His philosophy: Treat workers properly and don't over-manage them since they generally know more about their jobs than any supervisor.

Those in unions who have dealt with Ross say that he isn't just talking through his hat. He's not an idealogue, they say, just a rational, realistic businessman who knows how to get the best out of an organization.

If his rational, realistic approach succeeds in getting him the keys to Bethlehem Steel, Ross could quickly become the largest steelmaker in the country. If he uses the full capacity of both his ISG facilities and Bethlehem Steel's, no other American company will make as much steel.

And then the King of Bankruptcy could become the King of Steel.

True to form, Ross disavows both those labels as much as he does the vulture one.

"I don't think we're the king of anything," he said. "We're just trying to do our work."